Legal Affairs

Big Penalties Loom for Chevron in Ecuador

Sixteen years after it was first filed and seven years after it was tossed out of U.S. courts, an environmental contamination lawsuit growing out of Texaco's oil drilling in Ecuador has become a giant legal and public relations headache for Chevron (CVX), which bought Texaco in 2001. The suit was refiled in Ecuador, and a judge there is expected to issue a ruling later this year or early in 2010. It is widely expected that he will assess billion-dollar damages against Chevron, which argues that the proceedings are politically tainted.

Chevron's experience calls into question a near-reflexive response by businesses that are sued in the U.S. over matters involving their operations abroad: They prefer to argue that the claims would best be pursued where the alleged harm occurred.

At a hearing set for Sept 1. in federal court in Miami,Dole Food will have to deal with the consequences of such a strategy in litigation arising from banana farms it once ran in Nicaragua. Meanwhile in July, Pfizer (PFE) asked the U.S. Supreme Court to reinstate a lower court ruling that said a lawsuit against it would best be heard in Nigeria. That case involves claims for injuries and deaths allegedly caused by drug testing Pfizer did in that country.

The question of how companies should respond to these suits has grown more complex in recent years, says Arvin Maskin, a defense attorney at Weil Gotshal & Manges in New York who is not involved in the Chevron, Dole, or Pfizer cases. While it may still make sense to try to get the cases out of the U.S., where plaintiffs are entitled to gather extensive evidence and can win high verdicts, "you do take some real chances in a foreign regime," he says. Another long-held assumption—that the American lawyers spearheading these suits for foreign plaintiffs will give up once a case gets booted out of U.S. courts—is also going by the wayside.

Big Coalition Stung Chevron Strategy The Chevron litigation is a case in point. Plaintiffs' attorneys sued Texaco in federal district court in New York in 1993, seeking to hold the company responsible for widespread environmental devastation in the Amazon region of Ecuador, as well for as a host of health problems suffered by local residents. Texaco, which drilled for oil there from 1966 to 1992, said it cleaned up its mess and that in 1997 the Ecuadoran government signed off on the cleanup and released it from future claims. The company, now Chevron, persuaded U.S. District Court Judge Jed S. Rakoff to dismiss the case in 1996, arguing that it made more sense for the claims to be considered by Ecuadoran courts.

"Historically at that point plaintiffs' lawyers went away," says Steven Donziger, the lawyer who has been leading the charge for claimants in the Chevron case. "It was just too much trouble to litigate in another country." But Donziger didn't go away. He recruited Kohn Swift & Graf—a deep-pocketed plaintiffs' firm in Philadelphia best known for shareholder class actions—to finance pursuit of the case in Ecuador. Supporting the effort are advocacy groups such as Amazon Watch in San Francisco; "socially responsible" investment funds such as Trillium Asset Management, which has offered shareholder resolutions calling on Chevron to settle the case at every Chevron annual meeting since 2003; and even actresses Darryl Hannah and Trudie Styler (wife of musician Sting), who have lent their star power to generate publicity for the cause.

Observers of the proceedings in Ecuador, including Chevron, expect a ruling in favor of the plaintiffs. "We are anticipating an adverse judgment," says Chevron spokesman Donald Campbell. A court-appointed expert has recommended eye-popping damages of $27 billion, though that sum is not binding on the judge. Since Chevron has virtually no assets in Ecuador, plaintiffs will only be able to collect on a judgment if they can enforce it in the U.S. or elsewhere.

Dole: Pesticide Claims of $2 Billion Chevron is already maneuvering to head off that prospect. In 2001 the company filed statements by 14 legal experts attesting to the competency and fairness of the Ecuadoran legal system as part of its effort to have Judge Rakoff dismiss the U.S. suit. Now it contends the opposite. A six-page legal memorandum by Chevron's outside law firm King & Spalding is titled "Timeline of the Demise of Ecuador's Judiciary," a process it says began in 2004. Leftist President Rafael Correa, elected in 2007, now holds sway over the courts, Chevron asserts. Correa has publicly appeared with Donziger and Ecuadorian lawyers who represent plaintiffs suing Chevron and has expressed sympathy for residents claiming harm from oil waste.

If Chevron does find the Ecuadoran claims back on U.S. shores in the form of an enforcement action, it will not be alone. In September, lawyers for a group of Nicaraguans who claim they were made sterile after exposure to pesticide on banana farms operated by Dole Food will appear at a hearing in federal court in Miami. They are seeking enforcement of a $95 million award made by a Nicaraguan court. In recent years, courts in that country have awarded roughly $2 billion in damages against Dole.

In 1995, Dole won dismissal of federal claims after arguing that courts in Nicaragua were fair and impartial. That, says Dole attorney Scott A. Edelman at Gibson Dunn & Crutcher in Los Angeles, was before a law went into effect in 2001 that "made trials in Nicaragua a farce." (Earlier this year, Dole got thousands of Nicaraguan pesticide claims thrown out of court in California after a state judge ruled they had been fabricated; Dole contends that many of the cases pursued in Nicaragua are also bogus.)

Says Mark Sparks, a Beaumont, Tex., attorney seeking to enforce the judgment in Florida: "Seems like American companies think foreign courts are fair until one of the foreign courts happens to find against them."